By Effie Zahos, Money Magazine, May 2007
It's nice to find another way to get a foot in the household door sooner, but be careful the door doesn't slam on you.
We've had home loans that don't require a deposit, loans where you don't have to prove your income, maternity loans that give you a repayment break, and now "silent partner" home loans.
Not since credit cards were linked to home loans has such an innovative product been launched into the mortgage scene.
It works like this: you want a home but you don't have the full deposit, or maybe you can't buy where you want because you just can't afford it.
What do you do? You call on a "silent partner" willing to pay up to 20 percent of the cost without even asking you to pay one cent in interest on that part of the loan.
Equity finance mortgages (EFMs), developed by real estate fund manager Rismark and distributed through Adelaide Bank, do just that. Working in conjunction with a traditional home loan, an equity finance mortgage allows you some slack on the cost of buying a home, in return for a certain amount of shared equity in the future value of your home.
There are a few shared equity deals on the market using different structures. The Rismark/Adelaide Bank mortgage works like this:
Say you want to buy a $500,000 home. To be eligible for the EFM portion you'll need a minimum deposit of five percent of the purchase price $25,000 in this case. The maximum amount you can borrow interest free under the EFM is 20 percent of the home's value, or $100,000. So all up you now have $125,000 to put towards your home, meaning you only need to borrow the remaining $375,000 through a standard Adelaide Bank home loan.
The benefit? Well, there's no interest or principal repayments for up to 25 years (or the house is sold) on the EFM and because you only borrowed $375,000 using a standard home loan, instead of say the full $475,000, you save over $700 in monthly repayments.
The catch? Your silent partner can take up to a 40 percent share in capital gains once you home is sold or you refinance. Should the value of your home fall, its capital loss is capped at 20 percent.
Research from Cannex highlights you'd be better off with a traditional loan if you bought in a high-growth property market.
On the other hand, homeowners who buy in markets where growth rates are modest or flat come out in front with an EFM. Another concern with EFMs is that if these products become widespread they could drive property prices even further, making it harder for battlers, even with such an innovative product.
For the complete story see Money Magazine's May 2007 issue. Subscribe now.